August 27 2012

The Economics of Energy Efficiency

Vicki E. Alger

California State University Fullerton economics professor Robert J. Michaels recently wrote in the Wall Street Journal that:

Mandated increases in energy efficiency—popular almost everywhere on the ideological spectrum—have been implemented around the world. Laws like the European Union's new requirement for 15 percent energy savings, or the U.S. Senate's proposed Clean Energy Standard Act of 2012, appear like clear winners for almost everyone. If the costs of new technologies are within reason, they promise consumers lower energy bills and producers more profit while mitigating the environmental costs of energy development and consumption. There is just one problem: Basic economics says that the best way to promote some activity is to reduce its price. That often means efficiency requirements end up having the opposite effect than the one intended.

“Rebound” is one explanation. When consumers trade in their old refrigerators or air conditioners for newer, more efficient models, the price of operating them drops. That means they can afford to turn down the thermostat or get a bigger, fancier fridge with all the bells and whistles that actually uses more energy.

In the end, Michaels cautions, “Some efficiency regulations may be worth their costs, but the existence of rebound means that the nation can no longer accept legislation to improve efficiency without further thought.”

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